The escalation of health care costs in the US and the exacerbation by economic and public health crises has placed value-based reimbursement at the forefront of the health care policy and practice agenda. This chapter provides a brief history and evolution of global capitation in US health care, compares and contrasts this model with value-based bundled payment, assesses the pros and cons of global capitation, and explores key considerations for implementing capitated models in current orthopaedic practice.

Global capitation is a type of payment model designed for integrated health care delivery. Capitated payment models (also termed global payments or global budgets) are usually structured as a single, fixed prospective payment made by payers to provider organizations to cover the costs of a predefined set of services delivered to patients periodically, usually as a per-member per-month arrangement.¹,² Provider organizations include integrated care organizations, physicians, or large physician groups that aim to deliver all the necessary services to meet a patient’s health care needs (eg, diagnostics, home health, and inpatient and outpatient services) over a designated period of time. The total payment does not vary based on the services provided, and provider organizations are themselves simultaneously assessed for quality and outcomes of care delivered. Common features of global capitation models include the administration and oversight of cost and performance by clinicians, financial infrastructures configured around a baseline global budget, and broad stakeholder engagement between payers, clinicians, and policymakers.

In the broader context of US health care, the rapid escalation in health care spending (approximately 17% of gross domestic product in 2018) has failed to achieve a commensurate improvement in many population health outcomes³ (Figure 1). This vulnerability has stimulated a need to rethink health care payment and practice, which remains embedded in an unsustainable but
dominant fee-for-service (FFS) infrastructure.³ Global capitation offers one type of value-based reimbursement strategy for containing costs without sacrificing quality and striving to achieve outcome-based reimbursement benefiting both patients and clinicians (Table 1). Compared with FFS, global capitation aims to reduce the use of expensive or duplicative resources and low-value
interventions, issues that are prevalent in current orthopaedic practice. Capitation also provides an opportunity for sustainable value-based payment, capable of remaining buoyant amid various crises in health care from economic recessions to pandemics; these disruptions can affect volumes of inpatient and outpatient care, especially in the wide variety of preference-sensitive conditions, such as osteoarthritis.

In 1965, the US government enacted Medicare, government-funded health insurance programs, and the use of retrospective FFS payments. An exponential increase in use and costs of care in subsequent years resulted in the government and private payers seeking alternative reimbursement models that could curb this medical inflation. In the early 1970s, the Nixon presidential administration enabled the development of health maintenance organizations (HMOs) and some competitive medical plans.⁴,⁵ HMOs used capitated payment and aimed to reduce waste in the medical system while also increasing market competition. Competitive medical plans, although less commonly used, are a type of managed care organization that offers a prepaid capitated delivery similar to HMOs; however, they are not federally certified and therefore face less regulation compared with HMOs.

Following the HMO Assistance Act of 1973, HMOs became more common from the mid to late 1970s, garnering federal backing with additional supportive legislation and financial public assistance. In subsequent decades, HMOs saw substantial growth, influenced in part by the conversion of HMOs from nonprofit organizations to for-profit, private sector entities that experienced high volumes of enrollment. HMOs were primarily owned by insurance companies with employers paying the HMOs for services on a capitated basis, most commonly via per-member per-month payment arrangements. HMOs, in turn, continued to pay care delivery groups by using FFS, and in some cases, passed along a portion of the capitated insurance payment directly onto clinician groups, sharing some of the financial risk. Different strategies to limit health care consumption have been employed by HMOs, including mandates set for primary care providers to act as gatekeepers on the front lines, and some HMO plans formed stringent criteria for specialist-to-specialist referrals.

HMOs waned after reaching peak utilization around 1996 to 1998 (approximately 16% of all payment method types) before leveling off to approximately 7% in 2007 and 5.3% by 2013.⁶,⁷ Although HMOs were successful in mitigating the increase in national health care expenditures, critics flagged delays to treatment, rationing of care, and potential undertreatment as reasons to shift from these arrangements toward alternative payment models (APMs) focused on providing appropriate interventions in line with the patient’s needs. A growing number of patients and physicians expressed dissatisfaction with the quality of care with a sense that profits were driving the model, rather than care configured around the patient’s condition.⁸ HMOs decreased in utilization because of inadequate risk adjustments, resulting in ineffective accounting of the disease burden, and
inaccurate budgeting and side effects such as physician groups taking on more risk than they could manage. Ultimately, HMO use declined as FFS, preferred provider organizations (PPOs), and other open-access models continued to grow and increase market competition in the United States.⁷

Value in health care is defined as the health outcomes benefiting patients relative to cost.⁹ Passage of the Patient Protection and Affordable Care Act (colloquially known as Obamacare) enacted by the 111th US Congress and signed into law in 2010, allowed the creation of accountable care organizations (ACOs): groups of doctors, hospitals, and other medical specialists that are voluntarily committed to providing coordinated high-value care to Medicare patients.¹⁰ ACOs now have different forms based on the local health care environment and existing level of competition among clinicians. These include those piloted through the Centers for Medicare & Medicaid Services (CMS) and the Center for Medicare and Medicaid Innovation, such as the Medicare Shared Savings Program, as well as those developed by private payers. The goals of commercial ACOs mirror those of CMS ACOs. ACOs can use FFS billing approaches with productivity-based compensation, incentive-based compensation, or straight salaries, or structure payment through global capitation.¹⁰ Variable integration of bonus payments for achieving quality benchmarks can also be instituted.

Additional legislation supporting the transition from volume-based reimbursement toward that which is value-based includes the 2015 enactment of the Medicare Access and Children’s Health Insurance Program Reauthorization Act (MACRA). MACRA replaces Medicare’s reimbursement system originally implemented in 1992 and revised in 1997 as the Sustainable Growth Rate Formula.¹¹,¹²,¹³ Termed the permanent “doc fix,” this legislation authorized the implementation of an incentive payment program known as the Quality Payment Program (QPP).¹⁴,¹⁵ The QPP has two value-based payment tracks known as the Merit-Based Incentive Payment System (MIPS) and the advanced APM.¹⁵

The MACRA legislation is a pay-for-performance program but allows opportunities for capitation-based models. The aim of MACRA and the QPP is to transform payment for care based on quality, cost, promoting interoperability, care coordination, and improvement activities. The two tracks of the QPP allow the opportunity to blend different model configurations to mitigate unwarranted errors from processing different payment structures.¹⁴,¹⁵,¹⁶,¹⁷ Other programs such as CMS’s Medicare-Medicaid Financial Alignment Initiative, which began in 2015, implement capitated-payment reimbursement models in different states.¹⁸,¹⁹ This model enables CMS, a state, and a health plan to jointly enter a three-way contract to provide coordinated care. CMS and the state pay for the health plan and prospective capitated payment. This capitated model by CMS involves a blended capitated rate for Medicare-Medicaid enrollees (or dual-eligible individuals), whereas the health plans oversee coordinated care across the spectrum of Medicare and Medicaid services.¹⁹

Similar to previous capitated models such as HMOs, the current CMS Capitated Models aim for overall cost savings through improved management, decreased
use of high-cost services, and increased administrative and clinical efficiency. In contrast to HMOs, these newer models implement and use measures of quality improvement. To incentivize providers to meet quality thresholds, CMS and the state utilize withholding of a portion of the capitated payment to the participating health plan.²⁰ More recently, an option that aligns with both payment tracks includes the Direct Contracting model that commenced in 2021, a 5-year Medicare ACO that explores partially and fully capitated payment models.²¹ The next generation of ACOs and newer care delivery models developed by government and commercial payers oriented toward improving outcomes relative to cost may participate in capitated payment mechanisms such as the All-Inclusive Population-Based Payment (AIPBP).

Global capitation covers a range of services that can be used to manage the health care needs of a specific patient population (Figure 2). The financial risk largely falls on providers: although they benefit from the total savings for costs of care that remain less than a single, fixed prospective payment set for services required by the population served, they also experience a financial loss if costs exceed this target payment. The amount of payment is based on historical data or prospective actuarial assessment. In contrast, bundled episode payment, a single payment
made to cover the cost of services delivered by multiple providers over a defined time period for an episode of care (eg, total knee arthroplasty), offers an alternative model for value-based reimbursement. Although bundled episode payments have traditionally been targeted toward high-volume, high-cost procedures such as those piloted nationally in joint arthroplasty, they can also be configured around conditions, such as persistent joint pain secondary to osteoarthritis. Both approaches involve prospective lump-sum payments to cover the cost of care delivered, but they can differ in terms of population, scope of services, and duration of coverage (Figure 3). The debate continues around the optimal choice for a given health system in achieving value between global capitation and bundled episode payments.²² This chapter focuses on the strengths and weakness of global capitation and these are reflected against aspects of bundled episode payment.